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Forex Trading – FX Trading


									Forex Trading – FX Trading
        February 2010
IMPORTANT: This article is not a guide for investment. An
investment desicion which is only based on below information
may not be efficient as expected. We advise you to contact us in
order to benefit from our investment and trading services.

Foreign Exchange

This short introduction explains the basics of trading Forex online, a brief explanation of the
markets and the major benefits of trading Forex online. There are also two scenarios
describing the implications of trading in a bear as well as bull market to better acquaint you
with some of the risks and opportunities in the largest and most liquid market in the world.

As an additional aid for those who are new to Forex, there is also a glossary at the bottom of
this text which explains some of the terms used in connection with currency trading.

Foreign exchange , forex or just Forex are all terms used to describe the trading of the world's
many currencies. The forex market is the largest market in the world, with trades amounting
to more than $1.5 trillion every day. This is more than one hundred times the daily trading on
the NYSE (New York Stock Exchange) . Most forex trading is speculative , with only a few
percent of market activity representing governments' and companies' fundamental currency
conversion needs.

Unlike trading on the stock market, the forex market is not carried out by a central exchange,
but on the "interbank" market , which is thought of as an OTC (over the counter ) market.
Trading takes place directly between the two counterparts necessary to make a trade, whether
over the telephone or on electronic networks all over the world. The main centres for trading
are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading
centres means that the forex market is a 24-hour market.

Trading Forex
A currency trade is the simultaneous buying of one currency and selling of another one. The
currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or
the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called

The most important forex market is the spot market as it has the largest volume. The market is
called the spot market because trades are settled "immediately" or on the spot. In practice this
means within two banking days.

Trading on Margin
Trading on margin means that you can buy and sell assets that represent more value than the

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capital in your account. Forex trading is usually done with relatively little margin since
currency exchange rate fluctuations tend to be less than one or two percent on any given day.
To take an example, a margin of 2.0% means you can trade up to $500,000 even though you
only have $10,000 in your account. In terms of leverage this corresponds to 50:1, because 50
times $10,000 is $500,000, or put another way, $10,000 is 2.0% of $500.000. Using this much
leverage gives you the possibility to make profits very quickly, but there is also a greater risk
of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to
maximise your leveraging as the risks can be very high. For more information on the trading
conditions at Saxo Bank, go to the Account Summary on your Client Station and open the
section entitled "Trading Conditions" found in the top right-hand corner of the Account

Why trade Forex?

      24 hour trading
       One of the major advantages of trading forex is the opportunity to trade 24 hours a day
       from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a
       unique opportunity to react instantly to breaking news that is affecting the markets.
      Superior liquidity
       The forex market is so liquid that there are always buyers and sellers to trade with.
       The liquidity of this market, especially that of the major currencies, helps ensure price
       stability and low spreads . The liquidity comes mainly from large and smaller banks
       that provide liquidity to investors, companies, institutions and other currency market
      No commissions
       The fact that forex is often traded without commissions makes it very attractive as an
       investment opportunity for investors who want to deal on a frequent basis. Trading the
       "majors" is also cheaper than trading other crosss because of the high level of
       liquidity. For more information on the trading conditions at Saxo Bank, go to the
       Account Summary on your Client Station and open the section entitled "Trading
       Conditions" found in the top right-hand corner of the Account Summary.
      50:1 Leverage
       With a minimum account of USD 10,000, for example, you can trade up to USD
       500,000. The USD 10,000 is posted on margin as a guarantee for the future
       performance of your position.
      Profit potential in falling markets
       Since the market is constantly moving, there are always trading opportunities, whether
       a currency is strengthening or weakening in relation to another currency. When you
       trade currencies, they literally work against each other. If the EURUSD declines, for
       example, it is because the U.S. dollar gets stronger against the Euro and vice versa. So,
       if you think the EURUSD will decline (that is, that the Euro will weaken versus the
       dollar), you would sell EUR now and then later you buy Euro back at a lower price
       and take your profits. The opposite trading scenario would occur if the EURUSD
       appreciates .

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Important Forex Trading Terms

         Spread
          The spread is the difference between the price that you can sell currency at ( Bid ) and
          the price you can buy currency at ( Ask ). The spread on majors is usually 5 pips under
          normal market conditions. For more information on the trading conditions at Saxo
          Bank, go to the Account Summary on your Client Station and open the section entitled
          "Trading Conditions" found in the top right-hand corner of the Account Summary.
         Pips
          A pip is the smallest unit by which a cross price quote changes. When trading forex
          you will often hear that there is a 5-pip spread when you trade the majors. This spread
          is revealed when you compare the bid and the ask price, for example EURUSD is
          quoted at a bid price of 0.9875 and an ask price of 0.9880. The difference is USD
          0.0005, which is equal to 5 "pips". On a contract or position, the value of a pip can
          easily be calculated. You know that the EURUSD is quoted with four decimals, so all
          you have to do is the cancel-out the four zeros on the amount you trade and you will
          have one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a
          USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted
          with only two decimals.

Trading Scenario - Trading Rising Prices

If you believe that the Euro will strengthen against the dollar you'll want to buy Euro now and
sell it back later at a higher price.
You buy Euro               We quote EURUSD at Bid 0.9875 and Ask 0.9880, which means that you can sell 1 Euro for
                           0.9875 USD or buy 1 Euro for 0.9880 USD. In this example you buy Euro 100,000, at the quote
                           price of 0.9880 (ask price) per Euro.
The market turns           Later the market turns in favour of the Euro and the EURUSD is now quoted at Bid 0.9894 and
                           Ask 0.9899.
Now you want to sell       You sell Euro at a Bid price of 0.9894.
your Euro and get the
The profit is calculated as Sell price-buy price x size of trade (0.9894 minus 0.9880) multiplied by 100.000 = $140 Profit
follows:                    (Note that the profit or loss is always expressed in the secondary currency )

Trading Scenario - Trading Falling Prices

If, on the other hand, you believe that the Euro will weaken against the dollar, you'll want to
sell EURUSD.
You sell Euro               We quote EURUSD at a Bid price of 0.9875 and Ask price of 0.9880 and you decide to sellEuro
                            100,000 at a Bid price of 0.9875.
The market moves in your The Euro weakens against the dollar and the EURUSD is now quoted at bid 0.9744 and ask
favour                   0.9749.
Now you buy back your       You buy EUR at an ask price of 0.9749.
Your Profit/loss is then    Sell price-buy price x size of trade (0.9875 minus 0.9749) multiplied by 100.000 = $ 1260 Profit

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Remember that trading EUR 100,000 as we have done in our examples, does not mean that
you have to put up Euro 100,000 yourself. It means that you have to deposit 2.0% of Euro
100,000, which is Euro 2,000 on margin as a guarantee for the future performance of your


Appreciation                Anincrease in the value of a currency.

Ask                         Theprice at which you can buy. Traders also speak of an ask price,the price requested. This
                            usually indicates the lowest price aseller will accept.
Basecurrency                Thecurrency that the investor buys or sells (i.e. EUR in EURUSD).
Bear                        Someonewho believes prices are heading down. A bear market is one inwhich there is a
                            sustained fall in prices and which does not looklike it will recover quickly.
Bid                         Theprice at which you can sell. Traders also speak of a bid price,the price offered. This usually
                            indicates the top price apurchaser will pay.
Bid/Ask                     TheBid rate is the rate at which you sell. The Ask (or offer) rate isthe rate at which you can buy.
Bull                        Someonewho is optimistic about the market. A bull market is characterisedby enthusiastic and
                            sustained buying.
cross                       Whentrading currencies, the investor buys one currency againstanother. These two currencies
                            form the cross: for example, EURUSD.
Crossrate                   Anexchange rate that is calculated from two other exchange rates.
Depreciation/decline        Afall in the value of a currency.
Exchangerate                Whatone currency is worth in terms of another, for example the $Amight be worth 58 US cents
                            or 70 yen. Currencies traded freely onforeign-exchange markets have a spot rate (applying to
                            tradessettled 'spot', ie, two working days hence) and a forward rate.Countries can determine their
                            exchange rates in a variety of ways:a floating exchange rate system where the currency finds its
                            ownlevel in the market; a crawling or flexible peg system which is acombination of an officially
                            fixed rate and frequent smalladjustments which in theory work against a build-up of
                            speculationabout a revaluation or devaluation; a fixed exchange-rate systemwhere the value of
                            the currency is set by the government and/orthe central bank.
EURUSD                      Meansthat you trade EUR against dollars. If you buy Euro you pay indollars and if you sell Euro
                            you receive dollars.
FX,Forex, Foreign           Allnames for the transaction of one currency for another, e.g. youbuy £100.00 with $150.25 or
Exchange                    sell $150.25 for £100.00.
Interbank                   Short-term(often overnight) borrowing and lending between banks, as distinctfrom banks'
                            business with their corporate clients or otherfinancial institutions.
Interestrate differential   Theyield spread between two otherwise comparable debt instrumentsdenominated in different
Leverage(gearing)           Inthis case leverage means that the investor only funds part of theamount traded.
Long                        Tobuy.
Longposition                Aposition that increases its value if market prices increase.
Liquid(-ity)                Thecapacity to be converted easily and with minimum loss into cash.Ultra-short-dated treasury
                            notes are an example of a liquidinvestment. A liquid market is one in which there is
                            enoughactivity to satisfy both buyers and sellers.

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Margin                  Theinitial amount or deposit required when entering into a position.Margin is a guarantee for
                        future performance.
NYSE                    Acomputerised system providing brokers with the prices of sharesand securities traded on the
                        New York stock exchange and over thecounter. The quotes are published in real-time.
Openposition            Aposition in a currency that has not yet been offset. For example,if you have bought 100,000
                        USDJPY, you have an open position inUSDJPY until you offset it by selling 100,000 USDJPY.
"Overthe counter"       Whentrading takes place directly between two parties, rather than onan exchange.
Pips                    Apip is the smallest unit by which a cross price quote changes. Soif EURUSD bid is now quoted
                        at 0.9767 and it moves up 2 pips, itwill now be quoted at 0.9769.
Position                Money-market,futures, foreign-exchange and sharemarket traders talk of 'takinga position' which
                        simply means buying or selling one currencycross. 'Position' can also refer to a
                        trader'scash/securities/currencies balance, whether he or she is short ofcash, has money to lend,
                        is overbought or oversold in a currency,etc.
Risk                    Tryingto control outcomes to a known or predictable range of gains orlosses. Risk management
                        involves a set of steps which begin with asound understanding of one's business and the
                        exposures or risksthat have to be covered to protect the value of that business.Then an
                        assessment should be made of the types of variables thatcan affect the business and how best to
                        protect against unwelcomeoutcomes. Consideration must also be given to the preferred
                        riskprofile - whether one is risk- averse or fairly aggressive inapproach. This also involves
                        deciding which instruments to use tomanage risk, and whether a natural hedge exists that can be
                        used.Once undertaken, a risk-management strategy should be continuallyassessed for
                        effectiveness and cost.
Secondarycurrency       Thecurrency that the investor trades the base currency against (i.e.USD in EURUSD).
(variable currency or
counter currency)
Shortposition           Aposition that benefits from a decline in market prices.
Short                   Tosell.
Speculative             Buyingand selling in the hope of making a profit, rather than doing sofor some fundamental
                        business-related need.
Spot                    ASpot rate is the current market price of an asset.
Spotmarket              Thepart of the market calling for spot settlement of transactions.The precise meaning of 'spot'
                        will depend on local custom for acommodity, security or currency. In the UK, US and
                        Australianforeign-exchange markets, 'spot' means delivery two working dayshence.
Spread                  Thedifference between the bid and the ask rate.

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